SMSF documents likely to fail legal test

SMSF legal documents

Many SMSF documents are likely to fail future legal challenges and trustees should consider the source of the documents they use.

Many SMSF legal documents drafted to establish binding death benefit nominations (BDBN) and reversionary pensions (RP) are likely to fail legally and this will become increasingly evident as more of them are challenged in court, according to an SMSF lawyer.

DBA Lawyers director Daniel Butler said there was an increasing number of document providers working within the SMSF sector, including non-lawyers, and he was concerned about their ability to provide appropriate documents.

“A lot of people of people are promoting BDBNs and SMSF strategies and we don’t believe many will stack up to a lawyer’s scrutiny because they are so poorly construed,” Butler said.

“We are going into a period of time when there will be a testing of documents and strategies and a lot will hit the wall. Those who have been perpetuating approaches that are incorrect or invalid will be caught out.”

He said an ageing population combined with the economic downturn resulting from the COVID-19 lockdown was likely to result in more legal disputes around SMSFs and estate planning and the strategies put in place within BDBN and RP documentation.

“We are going into testing times and people will be aggrieved, and there will be more disputes and the reported cases are the tip of the iceberg,” he said.

“Disputes are good for lawyers when fees run into thousands of dollars, but they split families, which is often the result of going for a cheaper option when drafting a deed.

“The question that should be asked is: ‘What is the value proposition in a good document for a client?” and advisers should take a leadership position and choose the better option.”

The reason documents needed to be correctly drafted related to the fact there was no template for what should constitute an SMSF deed or the inclusion of a BDBN or RP within that deed, he said.

“In the past there has been a standard template for trust constitutions, but there is no standard template for a standard deed and there is little support for it,” he noted.

“We need to start at the position there is no normative point in RPs or BDBNs and instead they need to be tested to the satisfaction of a lawyer, because that is who will challenge them in court.

“In the fullness of time the outcomes of court cases will take us where we need to go, but only once the SMSF sector starts adopting best practice around drafting documents.”

His comments follow on from those of Cooper Grace Ward partner Scott Hay-Bartlem, who recently told the sister publication to  smstrusteenews, selfmanagedsuper, a fixed model for setting the priority of BDBNs and RPs was unlikely to find common ground in the SMSF sector due to differing views on how they operate.


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